3 Things: Bonds, Bulls, & Central Banks

[설국]

3 Things: Bonds, Bulls, & Central Banks

by Tyler Durden

Jul 14, 2016 4:30 PM

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

Who’s Buying It?

With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.

While I certainly do not disagree the breakout is indeed bullish, and signals a continuation of the long-term bullish trend, there are more than sufficient reasons to remain somewhat cautious. Earnings are still weak, there is little evidence of economic resurgence and inflationary pressures globally remain nascent.  But, for now, a rash of global Central Banks continue to support asset prices by increasing accommodative policies either through additional reductions in interest rates or direct injections of liquidity. As Matt King from Citi recently noted:

“It has been a surge in net global central bank asset purchases to their highest level since 2013.”

With the ECB in full QE mode, the BOC now using $300 billion in Pension Funds to prop up prices, and the BOJ now moving towards an additional $130 billion in QE as well, the liquidity push continues.

Interestingly, despite the push by Central Banks to loft asset prices higher, individual market participants as measured by the Investment Company Institute (ICI) have a different idea.

As shown in the chart above, despite asset prices ringing all-time highs, net equity inflows have turned decisively negative. This was much the same case following the 2012 market rout and it wasn’t until the launch of QE3 in 2013 that investors began to once again chase the markets.

The same can be seen for the American Association of Individual Investors as shown below.

While the ICI chart above shows “net flows,” the AAII chart shows percentage allocated to stocks, bonds and cash.The recent decline in percentage of stock holdings confirm‎s the recent net equity outflows from ICI.

However, despite the outflows from stocks, and increased allocation to bonds in recent months, the net exposure to equity risk by individuals remains at historically high levels with cash near historically low levels. Such suggests two things:

1. There is little buying left from individuals to push markets marginally higher, and;
2. The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.

Here is the point, despite ongoing commentary about mountains of “cash on the sidelines,” this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.

Of course, there is nothing wrong with that…until there is.

The question that everyone should be asking themselves is this:

“If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?”

Someone is going to be very wrong.

Market Surge Might Have A Problem

The recent surge in the market, as I discussed earlier this week, was directly due to the expectation of “helicopter money” from Japan.  Of course, as I have shown before, the recent market surges have been almost entirely due to the ongoing rhetoric from Central Banks globally, most recently to “save the markets” from the “Brexit.”

First of all, let’s remember that while “helicopter money” may seem like a good idea in the short-term, it is not a long-term solution as it shrinks the middle-class which is the ultimate driver of economic growth.

1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
2. Monetary policy does not create self-sustaining economic growth and therefore requires ever larger amounts of monetary policy to maintain the same level of activity.
3. Japan’s program will continue to push the Yen lower and the dollar higher. This will suppress oil prices, exports and ultimately earnings growth expectations leaving a larger gap between market prices and fundamentals. 
4. The filling of the “gap” between fundamentals and reality leads to consumer contraction and ultimately a recession as economic activity recedes.
5. Job losses rise, wealth effect diminishes and real wealth is destroyed. 
6. Middle class shrinks further.
7. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 
8. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence from Jim Quinn:

“The stock market has returned 60% since the 2007 peak, three times the growth in corporate profits and GDP. The all-time highs in the stock market have been driven by the $3.4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP. The valuation of the median stock is now the highest in history.”

Secondly, while the markets are rallying on hopes of “helicopter money” from Japan, the reality is those expectations may be misplaced. According to Reuters:

“There is no chance Japan will resort to ‘helicopter money.’

The Bank of Japan already gobbles up more government bonds than is sold to the market each month under its massive monetary stimulus program – dubbed ‘quantitative and qualitative easing’ (QQE) – deployed in 2013.

With the BOJ already keeping borrowing costs near zero with aggressive money printing, there is no strong push from premier Shinzo Abe’s administration to revise the law and force the central bank to resort to helicopter money, said the officials, who declined to be named due to the sensitivity of the matter.

It is also prohibited by law to directly underwrite government debt, which means parliament needs to revise the law for the central bank to start directly bank-rolling debt.”

Oops.

Bond Bull Ain’t Dead, Just Resting

This past Monday, as the markets broke out to new all-time highs, I increased net equity exposure in portfolios.However, I also took one other action which was to short interest rates to hedge the bond exposure in accounts. 

As I wrote:

“While the breakout has yet to be confirmed through the end of this week, interest rates have turned up suggesting a rotation, at least temporarily, from ‘safety’ back into ‘risk.’ Unfortunately, a pickup in volume to confirm‎ conviction to the move is still lacking at the moment.”

The chart below is updated through this morning. Nothing has changed.

So, while I shorted interest rates to hedge bond portfolios, this is a risk-management decision to maintain allocation structures and protect capital.

However, longer-term, as shown in the chart below, I expect rates to fall further.

How much further?

Like below 1% further.

With monetary velocity in a sharp decline, as monetary policy is a direct retardant to the demand for money through the system, and economic growth weakening, interest will fall further to reflect the weak economic environment. This will occur during the onset of the next recession.

In the meantime, however, I think there is a reasonable probability, if the market has indeed entered a market“melt up” stage discussed previously, rates could rise back to the top of the current downtrend around 1.8-1.9%.

If the current rally fails, and we continue to the current long-term market topping process, then rates would like stall out at roughly 1.6%.

As you can see we are currently playing with very small ranges. However, when it comes to rates even small movements can have a large impact on long-duration holdings.  From a portfolio management perspective, hedging interest rate risk currently is well worth the cost of insurance.

Betting on the “end of the bond bull market” is a trade I wouldn’t take.

Why? Interest rates are relative.

With global rates at zero to negative, money will continue to chase U.S. Treasuries for the higher yield. This will continue to push yields lower as the global economy continues to slow. What would cause this to reverse? It would require either an economic rebound as last seen in 50’s and 60’s or a complete loss of faith in the U.S. to pay its debts such as a collapse of the Government and the onset of the “zombie apocalypse.” 

We no longer have the drivers of manufacturing, demographics or credit expansion for the former, so I am ready for the latter.

[설국]

저자는 몇가지 예를 두어 시장을 안좋게 보고 있습니다. 먼저 전세계가 확장정책을 오래도록 써왔지만 효과는 없이 펜더멘탈과 실질 경기와괴리만을 만들어 소비를 위축시키고 경기침체를 불러왔다. 그 예로 두번째 그래프에서 보여지듯 산업업종을 대표하는 s&p지수는 올랐으나 그 아래 순자본유입을 나타내는 거래량은 마이너스 영역에 머물고 있다고 지적합니다. 이 말은 실제적으로 돈이 들어와 주가를 올린 것이 아니라 인위적으로 올렸다는 걸 뜻합니다.
확장적 재정정책은 단기적으로는 효과를 볼 수 있으나 장기적으로는 효과를 볼 수 없을 뿐만 아니라 실질적으로 소비를 위축시키고 경기침채를 불러오므로 주기적인 확장정책을

[설국]

쓰게 되는 악순환이 됩니다. 더구나 핼리곱터 머니를 뿌리겠다고 입을 열었던 아베는 실질적으로 정부가 발행할 채권을 중앙은행에서 사가도록 하기 불가능한 위치이므로 실현 불가능 할 거라 말하고 있습니다. 입법을 해야하는 처지인데 힘들고 또 그는 어느새 그런 의도로 한 말이 아니었다고 번복을 했지요. 국채를 발행해 시중에 판다면 시중 돈을 끌어다가 다시 뿌리는 것과 같으므로 이런 침체 시기에는 효과가 거의 없으며 오히려 부채만 늘리는 꼴이 됩니다. 그렇다고 발행한 국채를 직접 중앙은행이 사도록 하는 것도 모럴헤저드 돈을 그냥 찍어내겠다는 말과 다를 바 없습니다.
이와 유사하게 영국 역시 브렉시트 당시에는 금리를

[설국]

인하하고 재정확장 정책을 펴겠다 하던 말이 7월에 들어 금리를 동결하고 사태를 봐가며 하겠다며 8월로 연기했습니다. 자아 여기에서 우리는 어떻게 받아들여야 할까요. 이미 인지하고 있다시피 기존 방식으로 금리인하나 시중 국채매입과 같은 방식으로는 마이너스 금리의 가속화와 국채에 거품을 발생시킬 뿐 효과가 미비한지라 어떻게 해서든 이를 안하고 넘길 수 있으면 넘겨보자하는 꽁수가 숨어 있습니다. 매체를 통해서 좋아지고 있다. 중국 성장율이 올랐고 국채가격이 떨어지고 있으며 금값이 떨어지니 주식시장으로 들어가라 하고 시중자금을 홀리려합니다. 그러나 위에 올렸다시피 10년물 미국채 금리를 보면 전저점이 깨지는 순간

[설국]

국채를 팔아 국채가격을 떨구기는 했으나 수반된 거래량이 이를 뒷받침해주지 못하고 있습니다. 한 마디로 종이금을 공매도 치듯이 국채를 시중에 팔아 시그널만 인위적으로 만들려고 한 것이지요. 그러나 이렇게 해서 불량한 시장이 갑작스레 좋아진다면 얼마나 행복하겠습니까만은. 그렇게 쉬웠다면 이 사태까지도 오지 않았겠지요.
다음글에 보면 이탈리아의 부실이 얼마인지 프랑스와 독일이 불량 채권을 얼마나 지니고 있는지 나옵니다. 또 IS는 끊임없이 혼란을 야기시키고 있으며 그들의 목적은 EU의 붕괴 그로인한 난민자를 향한 분노를 야기시키고 그들안에 있는 이민자와 유색인종에 대한 반감을 키워 사회를 분열시켜 자신들

[설국]

추종자를 심어놓으려는 의도입니다. 브렉시트 전후로 영국은 브랙시트 판결을 뒤엎고 유로연합에 남을 것처럼 이 나라 뉴스와 방송에 도배질을 했으나 간단히 영국은 노땡큐를 했습니다. 이미 나온 마당에 다시 짚을 지고 불구덩이 안으로 들어갈 바보는 없습니다. 유로지역은 안팎으로 공격을 당하는 내우외환에 어쩌면 멀지 않은 미래에 유로가 분열되는 순간을 보게 되지 않을까..

[설국]

부연설명합니다. 아래에서 세번째 도표를 보면 s&p 500 지수와 금리가 한 방향으로 움직이다 최근 서로 반대로 움직이고 있습니다. 국채금리는 경기가 좋아져 주가가 상승하면 오르게 됩니다. 그러나 폭락 장세가 오자 정부들은 유동성을 풀어 돈 땜방질을 한 결과 주가는 상승했으나 금리는 여전히 신물 경기를 반영해 안전자산인 국채에 머물고 있기에 두 움직임이 상반된 모습을 보이고 있는 것입니다. 이격도를 보이면 둘은 다시 하나로 만나려는 성향을 보입니다. 그리고 둘 중 어느게 움직이는지를 보면 주가에 거품이 끼었는지 아니면 시중에 자금이 경기상황에 안맞게 안전자산에 머물러 있는 것인지 곧 보게 될 겁니다.

[설국]

TNX란 미국채 10년물 금리를 가지고 시카고 옵션거래소에서 지수로 만들어 상품을 팔고 있는 것으로 위에 15.22포인트는 1.522% 금리로 보면 됩니다.